World Bank cuts forecasts

NEW YORK/LONDON (Reuters) - The World Bank and Organization for Economic Co-operation and Development offered dispiriting assessments of the world economy on Monday, although corporate sentiment surveys in Germany and Japan created some hope that recovery could be on the way.

The surveys from Japan and Germany still expressed caution but indicated businesses are starting to feel more upbeat.

Indeed, German business sentiment rose to a seven-month high in June.

Japan's tankan survey showed less pessimism among big Japanese manufacturing companies.

Investors still found plenty to worry about, however. Oil prices dropped by 4 percent, while European and U.S. stocks began the week with losses on questions about the potential strength of an economic recovery.

The S&P 500 stock index had lost 2.5 percent by mid-afternoon in New York.

European Central Bank President Jean-Claude Trichet cautioned that policymakers must remain alert to financial risks despite initial signs that the pace of economic decline had slowed.

"While there are first signs that the pace of economic weakening is decelerating, we must remain alert. We are in uncharted waters, and there are still risks of a sudden emergence of unexpected financial turbulence," he said.

Angel Gurria, the head of the OECD, offered a similarly cautious assessment.

"We see a very difficult 2009, with negative growth in the OECD area. Unemployment problems are going to continue to linger," he told Reuters Television in an interview on the sidelines of a conference in Paris.

Adding to those wary comments, the World Bank said prospects for the global economy remain "unusually uncertain" as it cut 2009 growth forecasts for most economies.

SPENDING SPREES

Governments around the world have borrowed hundreds of billions of dollars to fight the worst economic crisis in decades, providing incentives for businesses and consumers to spend and embarking on big infrastructure programs to create jobs and stimulate activity.

They should stick to spending programs to reignite growth because their economies are still weak in spite of signs that the worst of the crisis may be past, World Bank Chief Economist Justin Lin said in an interview with Reuters.

Lin also said he was concerned about rising borrowing costs and weak external financing conditions for the emerging economies of Europe and Central Asia.

The U.S. Federal Reserve, like the ECB, has cut interest rates to record low levels and used unorthodox means to pump more money into the financial system.

The Fed's interest-rate setting committee will begin a two-day meeting on Tuesday, and analysts say Chairman Ben Bernanke will be under pressure to find a convincing way to explain why his central bank was in no hurry to raise rates.

Economists polled by Reuters, in fact, see no chance that the Fed will raise its benchmark short-term interest rate from the current level near zero.

Given that, most of the financial world is more focused on whether the Fed will expand its purchases of government debt from the $300 billion already pledged to fight the recession.

Also Tuesday, the latest U.S. existing home sales figures will be released, which should give some indication of whether the battered housing sector has bottomed.

The following day data on new U.S. home sales are due.

JAPAN SENTIMENT LESS BLEAK

In Japan, the Bank of Japan is unlikely to abandon unconventional stimulus policies even as the view from Japanese manufacturers improves, economists said.

Japan's business survey index (BSI) of sentiment at large manufacturers stood at minus 13.2 in April-June, compared with minus 66.0 in the previous quarter, the Ministry of Finance and the Economic and Social Research Institute said.

But Takeshi Minami, chief economist at Norinchukin Research Institute, said Japan still faced hurdles. "It's too early for the BOJ to examine an exit strategy. Companies are still saddled with excess capacity. Capital spending will likely remain weak for some time," Minami said.

Underscoring the troubles haunting some key economies, the World Bank cut its gross domestic product forecasts for Japan, the United States and the euro area for this year and next.

The bank, which recently cut its forecast for the global economy to a contraction of 2.9 percent from a projection for a 1.7 percent decline set in March, was releasing details on individual economies for the first time on Monday.

While the German June Ifo survey suggested better times may lie ahead, analysts said that did not mean its economy was now out of danger.

"The Ifo index often gives misleading signals at times when the expectations and current conditions deviate strongly. At the moment, current conditions have stabilized slightly, while expectations have shot up," said David Milleker, an economist at Union Investment.

(Editing by James Dalgleish)